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mREITs Preferreds Get Hammered

mREIT preferred issues took a horrific hammering yesterday with almost every issue down at least 2% and many down 5-8%. Current yields in the 9%-10% area are very common.

I keep a list of all the mREIT preferred issues here.

While these yields are tempting I will not be buying any more mREIT preferreds now (I own 1 ARR-C and it has been painful) because like some other income issues the mREIT’s are difficult to understand and thus when interest rates are moving folks simply sell them.

Recall a few years ago when Covid hit many of the mREIT’s were forced to suspend their dividends (later reinstated) as liquidity dried up and lenders (mREITs borrow money to lever their portfolio’s) demanded more collateral. With interest rates moving higher it appears investors believe that this could happen again–and of course it can happen.

I will be watching these issues closely because at some point in the future stability will return to the marketplace and there may be some tasty yields and capital gains to be had in the sector.

22 thoughts on “mREITs Preferreds Get Hammered”

  1. Agree with landlord, MREITs are bags of cash but you need to understand management, leverage, collateral, financing and common/pretty ratio.

    Take FBRT…

    Management gets an A+. Do you really think Franklin will let their new alt credit division fail? Nope, they have been expanding and have massive resources. Plus, management is buying back common with their own $.

    Leverage is ok at 3x. So let’s give that a B

    Collateral is B as well. They get A for senior multifamily but also have some legacy assets they are working through.

    Financing is also a B. About half is CLO which is less subject to market to market.
    I think they are about 40% repo.. but keep in mind private CRE prices don’t move much.

    Common/ pref ratio is something like 7x so they get an A+.

    This is all based on memory so I could be off with the data. Their latest presentation has details. https://s29.q4cdn.com/862505870/files/doc_downloads/2022/05/FBRT_NAREIT_Deck-6.6.2022_FINAL.pdf

    So add all that up, pref stock trading at $20, 7.5% coupon , div in a couple weeks, and it represents a compelling opp for a long term holder.

    Beyond a prolonged economic downturn, liquidity is main risk as it is thinly traded.

  2. ARR common stock my be a better (and way more risky) than its preferred stock? At these lows of $5.7x the managed $0.10 dividend is a hefty 20%

    It last went ex-divd Jun 14, 2022

  3. Like everything, there are more solid mReits and there are riskier mReits

    I have always owned some mReit preferreds. Made a nice bundle picking some more up in the Covid Crash. One of the few people I follow and trust on SA – Colorado Wealth Mgmt Fund does a good job covering mReits / mReist preferreds. As long as you stick with the less riskier ones, there are decent opportunities when they sell off due to general market panic

  4. Tim.. New offers and REIT very weak , SO many A-B rated at bargain Prices, with above 5.5 -6.5% returns ..BAC. JPM. COF.WFC. buying only A-B rated. Georges

  5. I feel like mREITs are actually very easy to understand. They’re just a fund of assets, not an operating business, and you can measure safety via asset coverage, leverage, and the riskiness of their holdings.

    By comparison, JPM or BAC are hugely complex businesses. On the flip side, they are so safe, you don’t need to understand them.

    The pandemic liquidity crisis taught an important lesson to the non-agency mREITs that got hit the hardest. They have far less reliance on mark-to-market financing and generally carry less leverage than before. However, it’s true that no one knows how this will pan out until they are actually tested and perform better than before.

    1. If you think the agency mreits are easy to understand, please tell me what MBS – Treasury spread would mean insolvency for each one lol

      The non-agency mReits also lost a lot of BV in 2020. I still don’t really understand how the preferreds on a lot of these issues traded back up to par with a much diminished common equity cushion.

      1. It depends on how management reacts to spreads blowing out but absent any action, book value sensitivity to spreads are often in the investor presentations.

        The preferreds got back to par through some combination of reducing portfolio risk, reducing the amount of preferreds outstanding and issuing more common stock.

        1. 🤮 Just why is everyone in such a great rush to get in front of the dramatic and early interest rate increases? I know the SA financial “experts” get paid per click, but they DO NOT have your best interest in mind. Timing is truly everything in making quality investment decisions. Why not sit this one out in the harbor (cash or cash equivalents) and let the storm pass? You and you alone are the captain o your ship. Do you want to sail into the hurricane? The Fed has said over and over that they are going to continue to raise interest rates (do they need to ring the Liberty Bell), why be a hero and get wiped out. Yes, you will get the interest payout of your investment/risk, but at what cost to your principle? Please, PLEASE everyone do your own deep due diligence and make smart decisions in this abhorrent and horrendous bond market.

          1. I take SA authors with several grains of salt. Rest assured I have done my own due diligence. Yes, I am underwater on my NRZ-D. I continue to add.

            Why not stay in the harbor? Obviously because I think I will do better in my position. If an investor had stayed in the harbor until the Covid storm passed, he would have missed a great buying opportunity. Time will tell this time. Good investing to all.

            1. This has absolutely NOTHING to do with Covid (kindly do not cheapen this conversation), the virus of the Fed and the effects on investments. If you look at history and what actual happens when the Fed begins to dramatically raise interest rates you can draw your own conclusion. “We are not makers of history. We are made by history.” No one is coming to save you, Azure

              1. Azureblue, you misinterpreted my post. I simply stated there are times like the Covid crisis… I could have named many others…when investors panic into cash when there are opportunities to make money. Maverick61 said the same thing on this thread.

                1. RB, if I did I certainly apologize to you. I see soooo many in the media (especially the financial media) give wild excuses because of Covid; these are all too dismissive for my liking. The economy and many companies did better because of restrictions (Amazon, Netflix etc) and there are always opportunities. Timing is everything. My point is that the Fed (Big Brother) is screaming from the rooftops that they are out to destroy the bond market and many investors and companies will suffer greatly and may never recover. There will be a plethora of issues bankruptcies/foreclosures/principle asset losses and I am trying to sound the alarm. Only you are responsible for your present and future investment choices and many become apathetic and indolent until they panic or real complications occur. This income market is not the time for neophytes and those that are not willing or able to put in the research to protect themselves so move aside until the storm passes. Even the brightest, most capable and ardent money managers will suffer great losses. In closing, I was just interviewed (grilled) on a large national investment show and I will continue to try and warn the public and hopefully I will get my message through to many that cannot afford or stomach the volatility and losses. I use to have a call in Q&A investment radio show to help others every Sunday evening that went to 550 +/- radio stations, but I am now a lone voice in a sea of lassitude and apathy. Lincoln said, “you cannot escape the responsibility of tomorrow by evading it today”. I am, Azure

          2. Going to cash could work if you’re an expert at timing the market. There have been many years where going to cash missed out on profits and dividends, once every ten years or so it’s a good plan.
            As a trader i’m buying some on the dips and selling when they bounce, sometimes as little as 1%. A losing strategy if prices keep dropping but when they recover then those small profits start showing up. And if they never recover then we’ve got bigger problems than the bottom line of my investment account.

          3. Azure, playing chicken isn’t for everyone. I just started to scale in Preferreds and solid corporate bonds because I think it’s starting to become a good environment to do just that. How much realistically do you think interest rates will go up before they break something? Why have most bond rates gone down the past couple days? I’m not convinced that real interest rates will ever see anything close to what some people are expecting. Lots of Solid IG Preferreds etc. close to the 7% range and others that I think will be fine LT close to 10. Yeah principal could go down but if you aren’t living off that why not start here? I guess if you think everything is going to hell, keep it all in savings. Meh, nobody is perfect with timing.

            1. Ken, thank you for your reply and thoughts. Each of us must determine what risks we are going to take in our portfolios for the perceived rewards we are to receive. I have stated over and over that people need to do their OWN deep due diligence or hire someone with a real proven published track record showing the real return through bear-markets (not just when the Fed is spiking the punch bowl). I perceive great principle threat today as the Fed keeps telling the worlds investors their mandate is to FIGHT INFLATION, this will delineate into much higher interest rates and pain when looking at your daily/monthly brokerage statement, unless people take steps to stop the bleeding 🩸 If investors do not heed the warning then they should be prepared for real principle degradation for many year to come. IMHO income investors should be playing defense until the Fed stops raising rates. I’m sure you know I managed billions of dollars of institutional portfolios for 24+ years on Wall Street after law school and remember all to well in 2000/2008 all the large brokerage firms telling their retail clients that “this is a normal correction” and “stay fully invested” (don’t stay in CD/MM/Cash we cannot make money that way) while quietly telling their institutional clients to “significantly raise cash”! I lived it and definitely see another exact repeat this year. Many watch CNBC daily for guidance (really the network should be viewed as entertainment only or publish each persons track record that makes blanket recommendations) and I’m sure you recall that their Golden Boy James Joseph “Cramer” screaming on TV, online and through his newspaper column on August 8, 2008 to buy bank stocks. Also, on March 11, 2008 on his show Mad Money he clearly and forcefully stated that “Bear Stearns is not in trouble” and “if anything, they’re more likely to be taken over”; if there ever was a charlatan. Lastly, the Fed this week just raised the Fed Funds rate 75bp, this is the central bank’s largest raise since 1994, thus there will be many defaults/bankruptcies as rising interest rates will destroy companies that need to survive through getting the corporate credit card out and borrowing large sums of money to stay afloat from trusting investors that do not understand the risk. Economies run in cycles and we just happen to be heading off the cliff with no parachute IMHO. I am, Azure

              1. During the covid crash a person buying SPY had approx 30 days to react and make a purchase at a significant discount from the recent past. Lets say 3/9/2020 until 4/13/2020.

                They had to ignore a CONSTANT stream of negativity. People screaming the world was ending. On top of that they had to put significant money to work to make a difference to their portfolio.

                Azure.. in some ways your posts while wise are also quite dramatic. They cause people to become fearful and hold off purchases. Heck, they might even sell some stuff after reading the above. It does not give any signal when something is a good purchase during times of rising rates.

                This post by Tim is discussing mREITs paying 8-10%. Other preferred are paying 6.5-8%. High quality IG is 5.5-6.5%. You know.. in that ball park.

                Did I miss in your posts at what level you would start purchasing by using a concrete example? Say a preferred by PSA. What yield are you like.. HOT DAMN.. 6%. BUY! Or perhaps 7% !! That is what I want and expect during a time of rising rates!

                Where is the plan? What is the signal? Give some meat here to act on. I am a total rookie compared to you but during covid I calmed myself down and did some basic OEPS estimates on the SPY and when it hit ~14-15 PE.. I was like BUY BUY BUY. That was my signal. How simplistic and kind of silly.. but hey… It worked for me at that time. Do you have something simplistic you can share with us that is similar?

                Now have I taken some big wad of cash and thrown it at BBs and Pref in the last few months? Nope. Have I sent chunks of cash over to make purchases and constantly reinvesting the divs/interest? Heck yea. I realize this pool of BBs and preferred will fluctuate in value but as long as I choose wisely the passive income is steady and reliable. It will purchase better offerings as time goes on. Rates will go up.. rates will go down.

                If I see something like A rated preferred paying 7 plus percent.. you can bet I will start sending over larger amounts of cash to take action. I have not truly developed my brain dead simple signal yet but I feel the time will soon be upon us. We won’t have a lot of time to act for a bottom. We, as a group, should be trying to figure out what is that brain dead simple signal of a good value no matter what is going on in the world?

                1. Thank you for your post. I would be glad to help you in anyway I could except to tell you what specifically to invest in. We are all unique with different risk levels, ages/time frames, volatility feelings, size of portfolios, knowledge base, heirs, estate plans, debt obligations etc. It truly would be impossible to give you recommendations unless we sat down and designed a plan for each person/trust. I have no vested interest (like an SA writer that gets paid per click and is forced to publish their BS) except the satisfaction of protecting those that cannot or will not safeguard themselves from what I believe we are currently in and what degradation is to come. Everyone should do their own deep due diligence and make the best decisions that they are able to do on their journey.
                  Ever notice when people lose money dramatically on an investment they become “long term investors”. Most have no clue what really to do each day/week/month/year because we are not taught to think for ourselves. Too many investing indians and rarely a chief on the reservation. When I was in high school one of my friends families had a substantial interest in one of the highest grossing horse tracks in America. I was invited on a Sunday to sit with my friend in the owners box and his Dad sat us both down before the first race and said, “I’m going to give you each $100 in $10 bills”. “This money is only to be used to bet the first 10 races and bet/pick the winner only. I learned more from that day then a lifetime of prudent investing could have taught me. In Latin we say, cogitare pro te ipso! Be well, Azure

          4. Not sure where I saw anyone in a rush to put all their funds to work. But for many of us, just going to cash and sitting on the sidelines is a not a winning strategy. I still recall the number of posts here from people who went to substantially all cash when covid hit – and they missed one of the best buying opportunities in recent times.

            I don’t know any of us are smart enough to time the market perfectly. You mentioned does the Fed need to ring the Liberty bell to tell you they are hiking rates. Nope, that has been made loud and clear, But by the same token no one is going to ring the same Liberty Bell when the market hits its bottom signaling its safe for everyone to buy stocks. So what I, (and I suspect some others) do is put some money to work when solid opportunities present themselves. I usually am fully invested save for about 3 to 5% cash held for new opportunities. I am more like 3 or 4 times that in cash now – which I have raised the last 6 months in anticipation of this (that’s my extent of market timing). To me it makes sense whenever an opportunity presents itself to take advantage of it. I have learned over the years, if you wait for the perfect time and opportunity, you miss lots of good money making ones. And I invest in a variety of things. Preferreds make up maybe 40% of my portfolio. MLPs, REITS, solid dividend payors, etc make up the rest. So when a preferred I like hits an attractive yield, or a common stock I follow hits a yield far above their normal, i will start to toe in.

            But to each their own. Everyone needs to do what they are comfortable with and in line with their own goals and philosophy

  6. I agree and have sold my mREITS for tax harvesting and then deploying the proceeds to quality bank prefers. But even a yield of 6.2% on BAC prefers may not be enough to stop the capital destruction if the Fed interest rates keep going up.

    1. REIT preferreds have historically had low bankruptcy rates. Is there a reason to believe many of them are about to go kaput? That would justify the falling prices, which are greater than rising rates would justify.

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